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Is Under Armour Inc's Valuation Over-the-Top?

FBR Capital raises its price target for Under Armour to $86.

Although we don't believe in timing the market or panicking over market movements, we do like to keep an eye on big changes -- just in case they're material to our investing thesis.

What: Under Armour(NYSE:UAA) was bucking the broader market on Tuesday morning, with the shares gaining as much as 2% courtesy of a raised price target, from $83 to $86, by broker FBR Capital. Under Armour closed yesterday at $77.29.

So what: FBR Capital's Susan Anderson argues for a higher price target on the basis of the potential of its footwear line:

Given Under Armour's (UA) recent success in footwear and the well-executed launch of Stephen Curry's first signature shoe, the "Curry One," we are introducing a month of UA Madness to coincide with "March Madness"... This week will focus on U.S. footwear and UA's positioning... For our first survey, in early March, we conducted a survey in the U.S. that delved into UA's running and basketball footwear positioning. Overall, we found a stronger-than-anticipated brand preference for UA footwear, considering its still-early foray into the footwear market. When adjusting brand preference for relative market share size, UA was the leader in both basketball and running (an indicator of brand potential). Based on UA's brand potential, we expect accelerated growth, as its footwear share should catch up with its strong brand preference. Given our confidence in UA's growth trajectory, we raise our price target to $86 from $83 (3.8x P/S applied to 2016 sales versus 3.7x previously).

It's not clear how "confidence in UA's growth trajectory" translates into a tenth of a point increase in its forward price-to-sales ('P/S') multiple, but that, in itself, raises the question of why FBR Capital is focusing on this specific multiple? The answer is probably that Under Armour's profits-based multiples look indefensible, with a price-to-earnings ratio of 83 and enterprise-to-EBITDA at 38.

Note that I'm not saying these ratios are necessarily indefensible, but they look stratospheric and are, therefore, difficult to use in building a compelling "buy" case for the shares.

Now what: I agree with FBR Capital that UA has already built a fantastic brand, which has tremendous value. Continuing to nurture that brand will be critical to further success, in terms of operating results, and, ultimately, for the stock. The shares have absolutely trounced the S&P 500 over the past five years (and from their November 2005 initial public offering).

However, UA is unlikely to reproduce that performance over the next five years. Although I expect operating results to go from strength to strength, the stock's valuation looks hard to carry. In that context, anyone buying the shares today must be prepared to hold them for a long time -- three to five years, at minimum -- in order to let the business earn its way into the valuation.